(Bloomberg) — A selloff on Wall Street went global as investors grappled with the threat of higher-for-longer interest rates, China’s sluggish economy and an Israeli counter-strike.
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The Stoxx Europe 600 Index sank 1.5%, echoing moves in Asian and US equities. The worry among strategists is that after a stellar start of the year, investors have become so resoundingly bullish that there’s not a lot of additional buying power left to propel markets further. The latest Bank of America Corp. survey found fund managers’ allocation to equities has hit the highest in over two years.
Plus, economic data continues to underscores US economic strength while conflict in the Mideast fans the risk of higher energy prices and inflation, frustrating hopes for imminent US interest rate cuts. With earnings season underway, there’s growing concern that the mega-cap leaders will struggle to justify their steep valuations. Major companies due to report today include Bank of America and Johnson & Johnson.
“Markets are looking for an excuse to take a breather and the combination of rising geopolitical risk alongside inflation fear and Fed anxiety is providing some decent ground for that,” said Florian Ielpo, head of macro research at Lombard Odier Asset Management.
Traders are no longer fully pricing in a Fed rate cut before November, while UBS Group AG strategists warned there may be no pivot at all and that US policymakers will instead embark on a hiking cycle. Treasury 10-year yields have spiked more than 10 basis points to 4.64% since the start of the week, while those on two-year notes are near 5%.
Recent data “has given the Fed pause for thought and the market has repriced quite significantly,” said Daniel Loughney, head of fixed income at Mediolanum International Funds. “We have a powerful dynamic whereby US growth and inflation dynamics are mingling with big-picture commodity and supply chain-related inflationary pressures.”
Meanwhile, the Bloomberg Dollar Spot Index climbed for a fifth day and reached the strongest level since November. The US currency has benefited from bets that rates will stay high for longer and demand for haven assets, especially after Israeli military officials vowed to respond to Iran’s missile attack.
US equity futures ticked lower on Tuesday in a sign of stability after the S&P 500 fell more than 1% in two straight sessions. Losses in European equities were led by miners after data suggested China’s first-quarter economic rebound is already fading.
Key events this week:
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Germany ZEW survey expectations, Tuesday
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US housing starts, industrial production, Tuesday
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Morgan Stanley, Bank of America earnings, Tuesday.
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Fed Vice Chair Philip Jefferson speaks, Tuesday
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BOE Governor Andrew Bailey speaks, Tuesday
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IMF publishes its latest world economic outlook, Tuesday
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Eurozone CPI, Wednesday
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Fed issues its Beige Book, Wednesday
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Cleveland Fed President Loretta Mester speaks, Wednesday
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Fed Governor Michelle Bowman speaks, Wednesday
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BOE Governor Andrew Bailey speaks, Wednesday
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Taiwan Semiconductor earnings, Thursday
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US Conf. Board leading index, existing home sales, initial jobless claims, Thursday
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Fed Governor Michelle Bowman speaks, Thursday
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New York Fed President John Williams speaks, Thursday
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Atlanta Fed President Raphael Bostic speaks, Thursday
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BOE Deputy Governor Dave Ramsden and ECB Governing Council member Joachim Nagel speak, Friday
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Chicago Fed President Austan Goolsbee speaks, Friday
Stocks
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S&P 500 futures fell 0.3% as of 6:10 a.m. New York time
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Nasdaq 100 futures fell 0.3%
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Futures on the Dow Jones Industrial Average were little changed
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The Stoxx Europe 600 fell 1.5%
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The MSCI World index fell 0.6%
Currencies
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The Bloomberg Dollar Spot Index rose 0.2%
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The euro was little changed at $1.0631
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The British pound was little changed at $1.2453
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The Japanese yen fell 0.2% to 154.55 per dollar
Cryptocurrencies
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Bitcoin was little changed at $63,190.96
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Ether fell 0.1% to $3,079.83
Bonds
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The yield on 10-year Treasuries advanced four basis points to 4.64%
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Germany’s 10-year yield advanced one basis point to 2.45%
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Britain’s 10-year yield advanced four basis points to 4.28%
Commodities
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West Texas Intermediate crude fell 0.5% to $84.97 a barrel
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Spot gold fell 0.4% to $2,373.39 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Allegra Catelli, Sagarika Jaisinghani, Farah Elbahrawy, Guy Johnson and Sujata Rao.
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